Monetising your brand

Valuing intellectual property is an important step for all companies and should be done with an eye on IP strategy. After IP assets are valued, it is often possible to use the information to create additional revenue streams or safeguard against the ramifications of potential legal battles

When valuing IP assets, it is essential to consider the unique characteristics of the subject asset and the context of the valuation assignment. Typically, valuations are needed for one of the following reasons:

  • when negotiating a transaction (eg, endorsement, licensing, M&A, leveraged buy-out);
  • when calculating infringement damages;
  • for financial reporting; or
  • for tax purposes.

The methods used to value intellectual property and intangible assets have many elements in common with those used to value tangible assets (eg, real estate, equipment or other real property). However, a lack of available information combined with legal and technical intricacies often complicates IP valuations.

There is a fifth reason for valuing IP assets: to analyse potential monetisation strategies. This article introduces the concept of IP strategies and briefly reviews both traditional and alternative valuation methodologies. It also includes a case study to illustrate how valuing intellectual property can be an important step for evaluating a company’s entire monetisation strategy.

Importance of IP strategies

Senior executives from all over the world and in every sector are increasingly recognising the importance of intellectual property in the global economy. Yet despite the realisation that intellectual property is a critical driver of value which can be used strategically to increase value and produce revenue streams, senior executives are often uncertain how best to implement, maximise and control it. The question remains: is intellectual property being undervalued and, as a result, are rights holders missing out on monetisation opportunities?

Bill Gates has emphatically stated how important it is for CEOs to integrate IP assets with their company’s strategic planning process to “drive growth, innovation and co-operative relationships with other companies” (Erik Sherman, “How to Protect Your Property,” Financial Times. November 11 2004). Intellectual property represents the majority of market value today. According to recent research, 85% of the market value of companies in the Nasdaq index comes from intangible assets (Louis Carbonneau, “IP Strategies for Changing Times – IPWatchdog.com | Patents & Patent Law”, IPWatchdog.com, April 7 2015). Although much value is associated with intellectual property, a degree of creativity is required for this value to be monetised.

Perhaps the importance of IP strategy is surpassed only by the misconceptions associated with it. While there is no established definition of ‘IP strategy’ in the traditional sense, it is a recognised part of a corporate strategy.

The success of monetising intellectual property – that is, generating additional revenue streams using the goodwill of a brand – is directly tied to the strategies selected for execution. We briefly introduce a few IP strategies to illustrate the diverse range of options available. By combining the expertise of a firm’s specialists (eg, the executives, legal and R&D departments), successful IP strategies can be formed out of a collaboration of diverse expertise.

Companies that have or might procure IP rights will consider different strategies from those that do not hold rights

One final but crucial consideration for IP strategies which should be borne in mind is context. Companies that currently have or might eventually procure IP rights will consider different strategies from those that do not currently hold IP rights, but are potential entrants into a market. The respective strategies that they might employ will differ. William W Fisher and Felix Oberholzer-Gee (“Strategic Management of Intellectual Property: An Integrated Approach”, California Management Review, 55.4 (2013): pp 157-83, Harvard Business School, 2013) suggest five IP strategies for a rights holder to consider:

  • exercising the intellectual property in the market;
  • selling the intellectual property;
  • licensing the intellectual property;
  • collaborating with competitors, suppliers, customers or developers of complementary goods and services to drive value/profits; and
  • donating the intellectual property for indirectly strategic purposes.

Conversely, any company considering entering markets already dominated by IP-holding firms has options that extend beyond simply challenging the validity of those rights in court. Fisher and Oberholzer-Gee again suggest five different strategies:

  • Challenge the intellectual property’s validity or legality of use through litigation.
  • Develop an alternative technology.
  • License the intellectual property from the rights holder.
  • Internally develop similar but sufficiently distinct IP rights.
  • Deliberately flood the market with a similar product or service so rapidly that litigation is rendered hopeless because either a licence is granted by the original rights holder or a court declares the similar product or service to be lawful.

Unfortunately, no single strategy is optimal for any and all circumstances. Intellectual property (both valuation and strategy) is both art and science and, as such, the choice of strategy can be measured as a function of a cost/benefit analysis. To complicate the task of choosing the best strategy, managers responsible for intellectual property are expected to juggle the increasing legal and technical complexities associated with patents, copyrights, trademarks and trade secrets.

The participation of managers, lawyers, designers and marketers is critical to the successful design, launch and sustainability of an IP strategy. Good communications across departments can markedly enhance the value of intellectual property. All too often, the legal aspects of developing intellectual property are not factored in until an obstacle has been encountered.

By first recognising the need for a proper IP strategy, senior managers can work with attorneys, R&D and financial professionals to align their goals: to maximise the value of and concurrently monetise the intellectual property.

Valuation methodologies

Traditional methodologies used to determine the value of intellectual property are:

  • the cost approach;
  • the market approach;
  • the income approach; and
  • a hybrid methodology, known as the relief from royalty approach.

When negotiating a transaction, the ability to develop accurate valuation models will lead to more informed decision making. However, the information available is often imperfect and will affect the choice of valuation methodologies. In the context of litigation, damages calculations require the application of valuation methodologies to determine the value of economic benefits lost, or not achieved, often when an arm’s-length transaction never would have occurred. As a result, the reasonableness of each method must be evaluated based on the context of the specific situation.

Cost approach

The historical cost of developing an asset is one method used to estimate its value. Based on the economic principle of substitution, the value of an IP asset should not exceed the cost of replacing or reproducing that asset. While the differences between reproduction cost and replacement cost may seem simply a question of semantics, these variations can yield different results when practised.

Market approach

The market approach values intellectual property by comparing the subject asset to publicly available transactions involving similar assets with similar uses. This provides a reasonable indication of value if there is an active market which can provide examples of recent arm’s-length transactions with adequate information regarding terms and conditions. Due to the ease of understanding, the market approach is also used extensively to value real property assets. The residential real estate market, for example, almost exclusively values properties using the market approach.

Income approach

The income approach calculates the present value of future income streams attributable to the asset – specifically, intellectual property in present circumstance. This method utilises forecasted financial results based on factors such as historical financials, industry trends and the competitive environment. While the income approach is likely the most widely used valuation approach, it can be complex and requires substantial knowledge and judgement on the part of the individual performing it. Numerous derivations of this approach can also be applied to analyse value. These include the direct cash-flow model, incremental cash-flow model, price premium model, excess earnings model and relief from royalty model.

Relief from royalty approach

The relief from royalty approach is a hybrid methodology which relies on aspects of the market and income approaches. A hypothetical situation is created to estimate what a business would pay to license its own IP assets in an arm’s-length transaction. The value is then calculated as the present value of the avoided hypothetical royalty charges.

Selecting a valuation methodology

The decision of which approach to use is generally based on four factors:

  • the uniqueness of the asset;
  • the amount of verifiable data available;
  • the context, purpose or objective of the analysis; and
  • the judgement of the valuation professional, which (one would hope) is based on extensive prior experience.

Various alternative valuation methodologies may be applied based on the context of the valuation. Below we introduce some of the methodologies available.

Alternative valuation methodologies

In addition to the traditional methods used to value intellectual property, numerous alternative methods are available. Many are derivations of the traditional approaches; in addition, there are proprietary techniques that have been developed by valuation professionals. A detailed explanation of each methodology could fill a book itself. Instead, this is intended to serve as an introduction to alternative IP valuation methods available.

Table 1 presents a non-exhaustive list of some of the techniques used by valuation professionals.

Table 1: Valuation techniques

Alternative valuation methodologies and techniques

Cometitive advantage technique

Valmatrix analysis (proprietary)

Premium pricing analysis

Brand value equation methodology (proprietary)

Incremental cost saving

Competitive advantage technique

Market multiple method

Decision tree analysis

Linear regression

Profit split methodology

Economic value added

Options pricing

Return on assets employed

Monte Carlo analysis

Whenever possible, it is useful to use multiple valuation approaches; this gives the valuation professional the opportunity to check the inputs and assumptions that he or she is relying on in his or her analysis. If the two approaches yield drastically different conclusions of value, this is a good indication that the data and assumptions need to be re-evaluated.

Brand monetisation case study

This section sets out a case study in which we determined a reasonable royalty rate for the use of a major medical university’s intellectual property (Brand IP) and – in conjunction with the related intangible assets – a reasonable annual licence fee for the non-exclusive use of its intangible assets. The case study highlights the importance of establishing a brand value for monetisation purposes; by understanding the value of the Brand IP, cash flows (royalties) can be maximised by implementing the most effective strategy.

Valuation of Brand IP

We were asked to analyse the value of the Brand IP of a major medical university. To maintain confidentiality, all numbers presented have been changed. Since its inception, the medical university has consistently operated under the same trademarks. In addition to operating under its identified marks, it has partnered with a large, publicly traded network of hospitals, which allowed a hospital to be operated by the hospital network under the name of the medical university, generating substantial value for both the network and the university. Moreover, the medical university was interested in monetising its brand by determining an appropriate royalty rate for the hospital network’s use of its Brand IP.

In order to determine a reasonable royalty rate, we relied on the market approach to identify comparable licence agreements, collecting royalty rate transaction data from various sources. The data was refined to a set of nine comparable agreements, all of which closely reflected the Brand IP such that each agreement granted an affiliate the right to use a specific trademark in the operation of a medical facility or system.

Table 2: Summary of comparable agreements

Comparable trademark licence agreements

Minimum

0.5%

First quartile

0.7%>

Median

1.0%

Average

1.1%

Third quartile

1.5%

Maximum

1.5%

Concluded royalty rate for Brand IP

1.0%

The royalty rates in this set of comparable licence agreements ranged from 0.5% to 1.5%. From this, we relied on the median rate of 1%. The extent of use of the Brand IP could limit or increase its associated royalty rate. The associated royalty rate could be lower for a limited, controlled, non-exclusive use of the Brand IP. Conversely, the rate was likely to be higher for an uncontrolled, exclusive use of the Brand IP. Historically, the medical university and hospital network had agreed to a limited, controlled and non-exclusive use of the Brand IP. Although the future use of the Brand IP could change, the associated royalty rate would then be renegotiated accordingly (see Table 2).

Table 3: Annual licence fees

Annual licence fee calculation

2014 net/operating revenue

>$100 million

Associated royalty rate

1.0%>

Annual fee for use of Brand IP

$1 million

To determine an appropriate fee structure for the use of the Brand IP, we applied our reasonable royalty rate to the relevant revenue stream to give a fixed annual licence fee. The annual flat fee to be charged to any potential affiliate would be based on that affiliate’s net/operating revenues. We therefore applied the 1% royalty rate to the net/operating revenues of the entity using the Brand IP. This calculation for the hospital network resulted in an annual flat licence fee of $1 million (see Table 3).

Conclusion

A major medical university partnered up with a large, publicly traded network of hospitals. This partnership allowed the hospital network to harness the goodwill of the medical university’s intangible assets. In exchange, a royalty was paid for the use of these assets. Although various types of partnership were considered, the hospital network corroborated the highest net present value and thus the greatest cost/benefit. This is an example of a thoughtful, intelligent branding strategy that resulted in increased monetisation for both parties.

Conclusion

We have introduced the importance of intangible assets and the ability to harness the goodwill of a brand, through setting an IP strategy, to create new revenue streams. By calculating the value of a brand, firms can assess different monetisation strategies. Accordingly, IP valuation serves as a springboard to monetisation through IP strategy.

While this article is not meant to serve as a comprehensive evaluation of the multitude of IP strategies available to rights holders, it illustrates that valuing intellectual property or calculating the net present value of various monetisation strategies is an important step. Fortunately, there are many different ways to value intangible assets, with more being developed all the time. Readers are encouraged to explore IP valuations from the perspective of IP strategy: after intellectual property is valued, what can the company do with this information to create an additional revenue stream or defend against the ramifications of potential legal battles?

Three primary conclusions can be drawn:

  • When making corporate-related decisions, intellectual property should be included for its strategic importance from the perspective of generating new and incremental revenue streams.
  • Streamlining communication between separate divisions of the business (ie, executives, legal departments and R&D/engineers) will both foster the development of the intellectual property itself and avert unexpected consequences – the collaborative efforts from each perspective will increase efficiency.
  • Valuation can serve as a critical bridge to monetising intellectual property. When valuing intellectual property, an accurate analysis requires detailed research, use of multiple methodologies whenever possible and a thorough understanding of each party’s economic circumstances. Once the IP value is determined, that information can be used for a variety of monetisation purposes, from selling, licensing or collaborating with competitors to donating the intellectual property.

We conclude by examining IP strategies deployed by Tesla. Elon Musk, the company’s founder, has developed a strategy to use its intellectual property “for the advancement of electric value technology” by granting open access to its patents (Elon Musk, “All Our Patent Are Belong To You”, Tesla Motors, June 12 2014). Perhaps developing the IP landscape by sharing proprietary intangible assets will drive innovation in an otherwise nascent market with high barriers to entry. What strategic implications does it have for Tesla as an individual company, the industry as a whole and other rights holders to freely distribute technology in this way? Perhaps opening the IP landscape by sharing proprietary intangible assets will drive innovation in an otherwise guarded market. The strategy bears risk, but voluntarily gifting the world its cutting-edge technology is likely to prove beneficial to Tesla in the long run: expanding the market will bring credibility and authenticity to a developing industry, fuelling its expansion and allowing Tesla to reap the benefit of its growth.

The IP landscape is shifting. It is crucial to establish an IP strategy (along with the corporate strategy) at all levels of a company, with the expectation that this will be frequently revisited. A flexible, robust integration with IP strategy will help companies to maintain a competitive advantage over the long term and, just as importantly, return value to stakeholders. 

Weston Anson is chairman, and Joshua Cawthorn and Paul Shurov are financial analysts, at CONSOR Intellectual Asset Management  
[email protected]om  
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